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Mexico boosts upstream spending

Regime commits further capital to reverse waning crude production

The federal Mexican government will raise its financial backing of Pemex, the state-owned oil and gas firm, significantly next year as it continues to eschew private investment.

The Andres Manuel Lopez Obrador administration says it will allocate around $27bn to Pemex’s total budget for 2020—an increase of 8.8pc over the approved financial plan for 2019. In July, the company issued its Business Plan 2019-23 which pledged in 2020 to apportion around $14bn to E&P and c.$3bn for a new refinery to be built in the president’s home state of Tabasco.

“In addition to the increase in resources, [Mexican finance minister] Arturo Herrera announced additional support for MXN$86bn ($4.41bn), of which MXN$46bn will come from fiscal support and MXN$40bn corresponds to direct capitalisation to the company,” says Guillermo Bilbao, energy and utilities expert at consultancy PA Consulting.

Falling flat

The priority for Pemex is to halt 15 consecutive years of crude production decline. Since output peaked in 2004 at 3.4mn bl/d, total national output has fallen by 46.4pc to just 1.6mn bl/d in 2018—an average annual drop of 112,000bl/d.

This year production has stabilised. First and second quarter output remained at around 1.6mn bl/d, although second quarter production dipped by 189,000bl/d, or 10.2pc compared with the same period in 2018. Most of this decline comprised of light and extra-light crude, contributing around 168,000bl/d, mainly due to water inflow at the Xanab field. The 2pc drop year-on-year in heavy oil output was caused by production fall from the mature offshore fields Ku, Maloob, Zaap and Akal.  

“Looking forward, more government support will have to go to Pemex” — Rodriguez, BBVA Mexico

The Mexican government has now set itself a bold production target of 1.95mn bl/d for 2020—a 17pc increase in just one year. “We have to keep in mind that the 1.95mn bl/d average target for next year not only includes the government’s own estimate of 1.87mn bl/d average for crude oil production from Pemex, but also throughput from the company’s business partners, migrations of Pemex’s fields to E&P contracts and Round 1 projects in the production stage,” says Arnulfo Rodriguez, principal economist at Mexican bank BBVA Mexico. 

To stem the collapse in production, Pemex is targeting 20 new fields and two existing developments—the Onel and Yaxche offshore fields. By year end, a total of 13 fields are expected to begin first production, which will add an initial extra 70,000bl/d and reach a peak of 320,000bl/d in January 2022. Pemex has contracted a total of 15 platforms and 16 pipelines across the 22 projects.

Vicious cycle

The financial health of Pemex is central to the company’s ability to finance its upstream strategy. A high tax burden has caused investment to fall annually by on average around 13.7pc across 2013-18, reaching its lowest level in 20 years. In 2018, direct taxes stood at just over double Pemex’s total investment.

To rectify the situation, Pemex has reduced the company’s tax obligation and freed up an additional $8.44bn over the next three years. In an investor presentation in July, Pemex said it would increase investments across the company by 37.7pc in 2019 compared with last year—devoting 80pc to the upstream.

1.6mn bl/d — average 2019 production

Pemex has also refinanced its short-term debt as the company focuses on its pledge not to increase its $104.4bn net debt this year. The government offered Pemex a $5bn debt rescue package to prepay bonds due in 2020 and 2023. The company then issued three new bonds with maturities of 7, 10 and 30 years.

But there remain doubts the company will meet its ambitious upstream target. “It is a step in the right direction but does not change the trajectory,” says David Padilla, managing director at consultancy IPD Latin America. “Reversing the ongoing production decline and somehow adding 300,000bl/d from current Pemex production levels only shows the political-over-technical policy making that continues to grip the government.”

Rodriguez agrees, adding that while the debt package will help stabilise the company’s current high debt, it will continue to be an “impediment to increasing investment in E&P, and looking forward more government support will have to go to Pemex”.

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